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May 15, 2016, 10:54 P.M. ET

Oversold: Long-Time Bear HSBC Upgrades India

By Shuli Ren

The underperformance of India’s stock markets has come to an end, according to long-time bear HSBC, which upgraded India from Sell to Neutral.

MSCI India has underperformed the MSCI Asia ex-Japan Index by 2.5% this year and is down 3.5% year-to-date.

First, while India remains expensive at 17.9 times 2016 earnings, after this year’s underperformance, its equity premium relative to the region has come down to its historical average, wrote HSBC strategist Herald van der Linde. This is especially true considering India fetches a handsome 15.7% return on equity. The benchmark MSCI Asia ex-Japan Index is valued at 11.9 times 2016 earnings, on 10.4% return on equity.

Second, “green shoots” are emerging in the Indian economy. “Demand for cement, long steel consumption, and power. Commercial vehicle sales and construction equipment sales also suggest domestic demand is picking up,” HSBC wrote.

Third, people are no longer crazy about India, which means its stock valuations are no longer as stretched. “Current exposure to Indian equities is as low as it has been over the past few years.”

Fourth, market liquidity is improving. For instance, the Reserve Bank of India reduced the daily maintenance limit of cash reserves to 90% from 95% previously, allowing banks to withdraw additional funds from the required cash reserve ratio and lessen pressure on interbank rates when liquidity is tight.

Last but not the least, India is a relatively defensive market. “Market volatility is significantly lower than in other markets such as China, Korea, or parts of ASEAN. Only Singapore and Malaysia exhibit lower volatility in the region.”

A major risk to HSBC’s upgrade is that earnings expectations are still very high. The street is still expecting Indian companies to deliver 17.5% earnings growth this year – and missed for five years in a row (yes, India’s equity analysts are this bad). A 10% growth is more realistic, noted HSBC.

About Asia Stocks to Watch

Barrons.com’s Asia Stocks to Watch blog analyses news and research from this vibrant and diverse continent, challenges conventional wisdom, and discusses investment ideas from Shanghai to Singapore, and from Indonesia to India.

Shuli Ren has written for Dow Jones Newswires on corporate strategies and Asia markets. Before becoming a journalist, Shuli conducted quantitative equity research at Lehman Brothers, and later Barclays Capital. She was also a consultant for Charles River Associates. She holds a CFA and FRM and studied economics at the University of Chicago’s graduate school.